Taking Account

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  • Taking Account

Salary Sacrifice

August 2010

Under certain circumstances it is possible to sacrifice part of your salary in exchange for a non-cash benefit.

Now that HMRC are increasing the income tax burden of the higher paid -a 50% income tax on income over £150,000 and progressive loss of personal allowance when your income exceeds £100,000 - the idea of taking a lower salary and working less hours might become attractive. If your taxable income is between £100,000 and £112,950 your marginal tax rate on the top £12,950 becomes 60% due to the progressive loss of your tax allowance. Lowering your salary to £100,000 and taking additional holiday entitlement to compensate may be worth looking at.

Salary sacrifice arrangements are particularly effective when exchanged for tax-free benefits such as child care vouchers or car parking. They are also attractive in return for employer pension contributions, especially when the employee is below the upper earnings limit for national insurance purposes. Typically pension contributions can be boosted by some 30% at no cost to the employee or employer.

To qualify as a genuine salary sacrifice arrangement an appropriate change must be made to your contract of employment - you will need to demonstrate that the loss or reduction in your salary is permanent.

If you are a lower paid individual any benefits of a salary sacrifice may be outweighed by other tax and benefit considerations. These could include:

1. Your entitlement to Statutory Sick Pay, Statutory Maternity Pay, Statutory Adoption Pay and the State Pension may be affected.
2. If the agreement with your employer is a lower salary in exchange for qualifying child care vouchers (a non-tax benefit), the value of the vouchers will likely be deducted from any Child Tax Credit that you were previously entitled to claim and of course you may be able to claim more Working Tax Credit as your earnings will have reduced.

Planning the scheme from both employers’ and employees’ viewpoint is essential.

Hilton Sharp & Clarke